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Investment Overview for Apple (NASDAQ:AAPL)

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Below are key drivers of Apple's value that present opportunities for upside or downside to the current Trefis price estimate for Apple:

iPhone

iPhone market share: Apple's market share in the mobile phone market has increased from around 3% in 2010 to about 10.3% in 2014, according to our estimates, as smartphone sales rapidly surpassed sales of feature phones. We expect the company to gain share in 2015 as well, owing to its new iPhone 6 and iPhone 6 Plus, which will effectively fill a void in the company's product portfolio and allow the company to compete in the growing phablet or large-screen smartphone market. We expect the number to increase at a slower pace over the Trefis forecast period, rising to about 11% by 2021 as saturation seeps into the high-end of the smartphone market. If Apple increases its iPhone market share to about 15% by the end of the forecast period, this could increase our price estimate for the stock by about 15%. On the other hand, if the company's market share comes in at around 9% by the end of the Trefis forecast period, this could reduce our price estimate for the stock by around 10%.

iPhone gross margins: Apple's iPhone gross margins have declined from around 54% in 2010 to about 47% in 2014, according to our estimates, owing to competition and slightly lower pricing. While we expect to see a slight improvement in margins in 2015, due to the introduction of the iPhone 6 Plus and new high storage capacity models, we expect margins to decline to under 40% over the long-term, as prices decline. In case iPhone margins decline more rapidly to around 25% by the end of Trefis forecast period, there could be a downside of around 10% to our estimate for Apple stock. On the other hand, if iPhone margins decline to around 45% over the Trefis forecast period, there could be an upside of over 10% to our price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Apple at the top of the page.

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Apple makes money primarily by selling mobile phones, computers, and tablets to consumers worldwide. Apple's well known consumer products include the iPhone, Mac, iPad and the iPod media player. In addition to selling hardware, Apple makes money by brokering the sale of music, films, TV shows, games, and iPhone software applications through its iTunes platform. Apple also recently launched its first wearable computing device, called the Apple Watch.

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We believe the iPhone segment is more valuable than the Macintosh and iPad segments for two primary reasons:

Large mobile phone market

We estimate that about 1.8 billion mobile phones were sold worldwide in 2013 compared to about 316 million PCs and 195 million tablets. Although Apple's iPhone market share remains quite small, the underlying market opportunity over the forecast period could be much larger.

High iPhone profit margins

We estimate Apple's iPhone gross margins were about 47% in 2013 compared to around 27% for Macintosh.

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Apple's Entry Into The Large Screen Smartphone Space

Large screen sizes have been a key driver of smartphone sales of late, as users increasingly choose to consume media and use their phones for more productivity-focused applications. The phablet market is expected to be the fastest-growing segment of the smartphone market, with IDC forecasting phablet shipments to grow at a CAGR of around 60% between 2014 and 2018. Apple finally launched two large-screen versions of its iPhone – the iPhone 6 and iPhone 6 Plus, which will sport screen sizes of 4.7 inches and 5.5 inches respectively, effectively filling up the void in its smartphone lineup. Accordingly, we believe that the company could see a stronger upgrade cycle given the possibility of pent-up demand from consumers who were holding off from buying new phones in anticipation of larger iPhones.

Increasing Competition and Saturation in High-end of Smartphone market

In June 2007, when Apple entered the then nascent smartphone market with the iPhone, Nokia and RIM were the only players in this segment. iPhone's success led to the entry of other players in the market, that has seen a huge spurt in demand in the recent years. Today, consumers have a huge array of smartphones to choose from, including but not limited to the Apple iPhone, BlackBerry, Android smartphones from Samsung, LG, and low cost manufacturers like Lenovo and Xiaomi. While the smartphone market is expected to see double-digit growth in the near term, much of the sales are likely to come from low and mid-priced handsets in emerging markets, while the the high-end of the market - which Apple caters to - is likely to become increasingly saturated.

Slowing iPad Shipments

While global tablet shipments continue to expand, the growth rate has been declining. As of Q1 CY2014, tablet shipments grew by just about 3.9% and IDC forecasts that tablet shipments for the year will rise by just about 12.1% , compared to a growth rate of around 51.8% during 2013. Additionally much of the growth in the tablet market is likely to come from low end tablets, given the saturating tablet market in developed countries. Given that the iPad caters to the high-end of the market, Apple has been seeing its tablet market share decline through the first half of CY2014.

Growth In Enterprise Market

In July 2014, Apple signed a deal with IBM that will see the two companies working together to further their enterprise mobility initiatives by bringing IBM’s cloud computing, big data and analytics capabilities to the iPhone and iPad. With the partnership, IBM will develop industry-specific apps and solutions for iOS devices, optimize its cloud services for the iOS platform and help with marketing Apple devices to enterprises. While Apple has been successfully increasing its presence in the enterprise space, the deal with IBM will give the company a more well-targeted push. IBM brings to the table decades of experience in understanding the needs of business customers and also has a sizable sales force needed to cater to large corporations.

Mac Market Share Growth

As of Q2 2014, Apple noted that its Mac line of computers had gained global market share for 32 out of the last 33 quarters. The company could continue to see growth, considering that it holds just about 5% share of the global PC market and has significantly better product differentiation given its proprietary Mac OS software and applications, sleek design and premium build-quality. Apple also benefits from the fact that it plays in the high end of the PC market – typically focusing on the lucrative $1,000+ price points – rather than the commoditized low and mid-range where a bulk of the volumes come from.

Apple Pay and iAds Growth Opportunities

While Apple's services such as iAd and Apple Pay remain insignificant to the company's broader financials, the company could see some growth and margins potential from these businesses. According to eMarketer, mobile advertising in the U.S. is expected to have grown by around 83% in 2014 to $18 billion, surpassing other forms of media including newspapers ($17 billion) and radio ($15.5 billion). Payments also represent a growth market for Apple. Mobile in-store payments in the U.S. are set to rise from around $2 billion in 2013 to around $189 billion by the year 2018, translating to a CAGR of about 148% according to BI intelligence.

Trefis Forecast Rationale for Unit Sales of Apple TV

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${forecast} represents the number of units of Apple TV sold by Apple.

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${forecast} has increased from around 0.4 million units in 2009 to over 8.5 million units in 2012 according to our estimates.

Trefis forecasts that ${forecast} will continue to increase at a fast rate for the next few years before stabilizing towards the end of our forecast period.

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Trefis considered the following factors for its forecast:

New Apple TV priced at $99

Apple unveiled the $99 Apple TV that is a fourth of the size of the original. It has no local storage and streams the content from the Internet to the TV. Content can be streamed from sites like Netflix, YouTube as well as from PCs. We believe this lower priced Apple TV will help boost its sales.

iTunes success to affect adoption of Apple TV

As consumers become conditioned to using their TV as a media entertainment center for downloadable TV shows, films and music, success will be dependent on Apple's ability to provide attractive content for consumers through its iTunes online store by establishing contracts with TV and film producers.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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